Luxembourg

Politics:

• Analysis

  Luxembourg politics: Banking secrecy criticised

  Luxembourg politics: Banking secrecy criticised

  FROM THE ECONOMIST INTELLIGENCE UNIT

  Plans to give the European Commission power to negotiate measures to combat tax avoidance were vetoed by Luxembourg and Austria on May 16th. The Danish presidency of the EU had sought to give the executive body the right to talk with Switzerland, Liechtenstein, San Marino, Monaco and Andorra. However, Luxembourg stated that it opposed the plan as it would have given the Commission too much freedom of action in such a sensitive area.

  The Commission and several member states are seeking to close the loopholes in the 2003 EU savings directive in order to prevent individuals from avoiding tax in financial centres like Luxembourg that have banking secrecy laws. Ideally, they would like to end banking secrecy. The fear is that strong unilateral measures would drive savings out of the EU. The Austro-Luxembourg veto received strong criticism from Danish and other political figures around Europe.

  Meanwhile, Austria has signed a bilateral savings tax deal with Switzerland in which Swiss banking secrecy is accepted. Similar agreements have been made with Germany and the UK. The Commission has protested about these, saying they make it harder to achieve a pan-EU agreement. However, the signatories say the agreements give them quick access to extra income.

  June 12, 2012

• Background

  Luxembourg: Political forces

  Traditionally, the three major forces in Luxembourg politics have been the Christian Social People's Party (CSV), the Socialist Workers' Party (LSAP) and the Democratic Party (DP), but since the late 1980s the Action Committee for Democracy and Pension Reform (ADR) and the Greens have challenged their dominance.

  The Christian Social People's Party

  The CSV has been in government continuously since 1919, with the exception of a single term of five years in 1974-79, when it remained the strongest individual party but was opposed by a DP-Socialist coalition. It is a centre-right party with strong, but increasingly strained, links to the Roman Catholic church and to the Christian trade union. Its espousal of pragmatic market-oriented policies, but with a consideration for the consequences for the less well-off, has enabled the CSV to govern successfully in partnership with both the LSAP and the DP, ensuring continuity in national policy.

  The Democratic Party

  Traditionally seen as an economically liberal party, the DP's support had been on a slow upward curve during the 1990s, as the economy became increasingly focused on its services sector. However, the party leadership made an opportunistic bid for power by supporting the public-sector workers' pension claim in opposition to the government in 1998. This helped win a seat in government after 1999, but the government's subsequent failure to engage in economic reform led to the disillusionment of many core supporters in 2004. In local elections in October 2005 it did better than expected in holding on to the mayoralty of Luxembourg-City, but the party lacks strong leadership.

  The Socialist Workers' Party

  The LSAP is a party of the centre-left, but it has shown awareness of the needs of the business sector as it seeks to create employment. Between 1984 and 1999 the LSAP was in harmonious coalition with the CSV, and this partnership was resumed in 2004. A concern for the party is that, despite a degree of discontent with the government in the run-up to the election in June 2004, there was little change in the LSAP's popular vote. Traditionally seen as the party of the manufacturing working classes, it is attempting to attract support from the services sector.

  Greens

  After becoming the fourth-largest party in 2004, the Greens affirmed the pragmatic "eco-realist" policies of their current leadership. While much of their support comes from the left, their stance is sufficiently centrist to make their offering increasingly palatable to disgruntled voters of the centre or even right. The party has a chance to enhance its reputation after becoming the junior coalition partner with the DP in the high-profile Luxembourg Commune following the October 2005 local elections.

  The ADR

  The Action Committee for Democracy and Pension Reform (ADR) began life as a single-issue party, which sought to increase private pensions to the level of the generous public-sector schemes, but it now positions itself as an anti-establishment, populist party. The ADR has taken support from all three established parties, but principally from the CSV. The 2001 pensions deal met the ADR's main demands on pensions, and some expulsions of asylum seekers blunted its attacks on that issue. Its share of the vote fell in 2004 and in the 2005 local elections. The party has been shunned by all other parties at local level and this has discouraged the recruitment of young talent. One of the founding members left the party in 2006 over differences regarding an attempted rebranding, and the proposed EU constitution.

  Far left

  The different strands of the far-left were brought together as The Left in the 1999 election, which managed to take a seat from the LSAP. However, the Communist Party broke away in 2003, which split the vote in 2004, allowing the LSAP to make its only gain in the election.

  March 20, 2007

• Structure

  Luxembourg: Political structure

  Official name

  Grand Duchy of Luxembourg

  Form of state

  Constitutional monarchy

  National legislature

  Chamber of Deputies of 60 members elected by proportional representation for a five-year term

  Electoral system

  Universal direct suffrage over the age of 18; voting compulsory for all registered (foreign residents are not obliged to register)

  National elections

  June 7th 2009; next election due in June 2014

  Head of state

  Grand Duke Henri since the abdication of his father, Jean, on October 7th 2000

  National government

  Council of Ministers, headed by the prime minister. The prime minister is appointed by the Grand Duke, who is constitutionally vested with executive power, although in practice he only has ceremonial functions. The current government, comprising the Christian Social Party and the Socialist Workers' Party, was formed on July 29th 2004

  Main political parties

  Christian Social Party (CSV); Socialist Workers' Party (LSAP); Democratic Party (DP); Alternative Democratic Reform Party (ADR); Green Party; The Left; Communist Party (KPL)

  Council of Ministers

  Prime minister & minister of Treasury: Jean-Claude Juncker (CSV)

  Deputy prime minister & minister of foreign affairs: Jean Asselborn (LSAP)

  Key ministers

  Agriculture, sport & solidarity: Romain Schneider (CSV)

  Culture, relations with parliament & administrative reform: Octavie Modert (CSV)

  Economy & foreign trade: Etienne Schneider (LSAP)

  Education & training: Mady Delvaux-Stehres (LSAP)

  Finance: Luc Frieden (CSV)

  Family, integration & co-operation: Marie-Josée Jacobs (CSV)

  Health & social security: Mars Di Bartolomeo (LSAP)

  Interior, planning & defence: Jean-Marie Halsdorf (CSV)

  Justice, civil service, research, communication & religion: François Biltgen (CSV)

  Sustainable development & infrastructure: Claude Wiseler (CSV)

  Work, employment & immigration: Nicolas Schmit (LSAP)

  Central bank governor

  Yves Mersch

  December 11, 2012

• Outlook

  Luxembourg: Key developments

  OVERVIEW

  The coalition government of the Christian Social Party (CSV) and the Socialist Workers' Party (LSAP) will remain secure until the general election scheduled for June 2009. The government remains popular and the CSV and LSAP are likely to be in a position after the election to continue in office. The prime minister, Jean-Claude Juncker, will try to play a constructive diplomatic role in bringing the EU through the crisis created by the rejection of the Lisbon treaty in a referendum in Ireland. The Economist Intelligence Unit believes that economic growth is likely to slow from 4.5% in 2007 to 2.8% in 2008 and 2.6% in 2009, which would still be much stronger than the euro area average, although possible loss of confidence in euro area banks as a result of developments in the US and UK could lead to a sharper slowdown. Inflation is forecast to average 4% in 2008 and 3% in 2009.

  Key changes from last month

  Political outlook

  The prime minister, Mr Juncker, has been reappointed for a third two-year term as chair of the EU's Council of economy and finance ministers. He has also announced that he will head the CSV's list in the June 2009 general election.

  Economic policy outlook

  The Luxembourg authorities have not felt the need so far for any drastic action to control the consequences of current international financial turmoil, but the government has banned the practice of short-selling of assets that the seller does not actually possess.

  Economic forecast

  We continue to expect a moderate slowdown from growth of 4.5% in 2007 to 2.8% in 2008 and 2.6% in 2009. The latest domestic indicators are reassuring, but there is a small possibility that some financial institutions with a large presence in Luxembourg could be adversely affected by the current international loss of confidence.

  September 24, 2008

Economy:

• Background

  Luxembourg: Population

  On January 1st 2006 Luxembourg's resident population totalled 459,500, which is just 0.1% of the total population of the EU. The proportion of foreign citizens, at nearly 40% of the total resident population, is large and continues to grow. It was just 26.3% in 1981. The total population grew by 19.5% between 1992-2006, but while the foreign population rose by an estimated 61%, the Luxembourgish population grew by just 2%. Well over one-third of immigrants are of Portuguese origin. In addition to foreign residents, crossborder workers from France, Belgium and Germany play an important role in the Luxembourg economy, accounting for 39% of the workforce.

  March 20, 2007

• Structure

  Luxembourg: Economic structure

  Economic structure: Annual indicators

  	2008a	2009a	2010a	2011a	2012b
  GDP at market prices (€ bn)	37.4	36.0	39.9	42.6	44.1
  GDP (US$ bn)	55.0	50.2	52.9	59.3	56.6
  Real GDP growth (%)	-0.9	-4.1	2.9	1.7	0.1
  Consumer price inflation (av; %)	4.1	0.0	2.8	3.7	2.6
  Population (m)	0.469	0.471	0.474	0.477	0.479
  Foreign-exchange reserves excl gold (US$ m)	334.6	730.5	747.1	900.5	n/a
  Exchange rate US$:€ (av)	1.47	1.39	1.33	1.39	1.28
  a Actual. b Economist Intelligence Unit estimates.

  Download the numbers in Excel

  Value added by sector, 2011	% of total	GDP by expenditure 2011	% of total
  Financial services, real estate & business services	48.1	Private consumption	31.3
  Trade, repairs, catering, transport & communications	21.2	Public consumption	16.4
  Public, social & personal services	17	Gross fixed investment	19.0
  Industry & agriculture	7.6	Stockbuilding	2.1
  Construction	6.1	Exports of goods & services	176.5
  Total	100.0	Imports of goods & services	145.3
  Principal exports 2011	€ m	Principal imports 2011	€ m
  Machinery and transport equipment	8,093	Machinery and transport equipment	9,374
  Chemicals and related products, n.e.s.	1,293	Mineral fuels, lubricants, and related materials	3,249
  Food, drinks and tobacco	1,278	Chemicals and related products, n.e.s.	2,697
  Raw materials	698	Food, drinks and tobacco	2,506
  Main destinations of exports 2011	% of total	Main origins of imports 2011	% of total
  Germany	28.9	Belgium	33.9
  France	20.2	Germany	29.1
  Belgium	17.2	France	12.0
  UK	9.5	China	7.7

  Download the numbers in Excel

  Download text file (csv format)

  December 11, 2012

• Outlook

  Luxembourg: Country outlook

  Luxembourg: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Luxembourg has a long tradition of political stability and this will continue over the forecast period and beyond. The system of proportional representation means that coalition governments are the norm. The Christian Social Party (CSV), which won 38% of the vote at the last election in June 2009, is unlikely to be challenged as the strongest party. It is currently in coalition with the centre-left Socialist Workers' Party (LSAP). The coalition has a comfortable majority of 39 seats out of 60 in parliament. There have been tensions between the minister of finance, Luc Frieden (CSV), who has pressed for reforms to established privileges such as the wage indexation system, and has recently called for expenditure cuts, and some of his socialist colleagues, who together with the trade unions have resisted changes to the wage indexation system. However, in December 2011 the government imposed a compromise reform on wage indexation and this has not caused industrial action. Disputes on other issues may arise, but the Economist Intelligence Unit expects the coalition to remain in office until the next election is due in 2014. If the coalition were to break apart, the likely outcome would be a new coalition of the CSV and one or more of the current opposition parties. The opposition is dispersed between the centre-right Democratic Party (DP) with nine seats, the Green Party with seven seats, the moderately nationalist Alternative Democratic Reform Party (ADR) with four seats and The Left with one seat. Either the Greens or the DP would, on their present representation, be able to give the CSV a parliamentary majority.

  ELECTION WATCH: The last general election was in June 2009. The centre-left coalition that is now in its second term is expected to remain in office for the full five years until the next general election in June 2014. There is a conceivable risk of the government collapsing before then. If this were to happen, the CSV could form another government with the DP within the existing parliament. It is also possible that a new coalition would seek legitimacy through a new election. The CSV is likely to remain the largest party after the next election, probably followed by the LSAP, which is therefore likely to remain the CSV's coalition partner. The DP and Green Party will compete to be the third-largest party.

  INTERNATIONAL RELATIONS: The prime minister, Jean-Claude Juncker (CSV), is stepping down as head of the informal group of euro area ministers of finance (the Eurogroup), and his role has recently been a relatively low-profile one. Luxembourg has a clear interest in financial stability and the euro zone holding together as the basis for its economic success. Although Luxembourg's banks, which are almost entirely subsidiaries of banks based in other countries, are not heavily exposed directly to the peripheral euro zone countries, the economy will be significantly affected by financial developments elsewhere in the euro zone, especially given the dominance of the financial services sector.

  POLICY TRENDS: Although Luxembourg has low sovereign debt and deficits, there are long-term concerns about the viability of the generous pension system. Therefore, as in other euro area countries, one of the main focuses of economic policy is fiscal consolidation, with moderate spending cuts in the 2012 budget, and further cuts likely in 2013. The government is currently debating longer-term plans to try to agree pension reform. Another important element of debate is wage policy. Together with Belgium, Luxembourg has a nationwide system of compensating wage earners for price increases. Business leaders are concerned that this will make Luxembourg uncompetitive as well as adding to the state's wage bill. A 2.5-percentage-point increase in wages took place in October 2011 and another would have occurred in early 2012 if the system had been fully implemented. However, in December 2011 the government announced that it would only allow one increase in wages of 2.5% a year up to 2014, irrespective of the rate of inflation, which should prevent a further sharp deterioration in competitiveness. The government has acted to open the Luxembourg labour market to qualified migrants from outside the EU, which it hopes will help to keep down labour costs, as well as boost expertise. Employment in government services is now open to citizens of other EU countries.

  ECONOMIC GROWTH: Luxembourg GDP grew by 2.7% in 2010, but slowed to 1.6% in 2011. We forecast a mild recession in 2012, with GDP falling by 1%, and a weak recovery to 1% growth in 2013. We expect that private consumption will slow to 0.8% in 2012 and 0.7% in 2013 as confidence weakens, and employment growth will slow or come to a halt, as will real wage growth, with the indexation mechanism being curbed so as not to compensate fully for inflation. Assuming stronger consumer confidence, we forecast that private consumption will pick up to 1.6% in 2014. Investment plummeted by 14.5% in 2009, but recovered strongly in 2010 and 2011. However, we expect a moderate fall in 2012 and only a slight rise in 2013.

  INFLATION: Inflation, according to the national measure has eased since late 2011. The previous rapid increase was mainly caused by fuel prices, but these carried through into the wage indexation system. However, such increases were in December 2011 and are limited to once a year up to 2014. With fuel and commodity prices easing and the economy slowing, we forecast that inflation will fall from 3.4% in 2011 to 2.6% in 2012 and 2.7% in 2013.

  EXCHANGE RATES: Although not our central forecast, there is a high risk that several countries will be forced to leave the euro zone during the next two years. Even assuming that it survives in its present form, the euro will remain volatile in response to the region's debt and banking crises. The euro weakened over the past year, from a peak of US$1.46:EUR1 in April 2011 to US$1.26:EUR1 in late May 2012 as fears over Greece's position in the euro zone caused flight from euro assets. Given persistent uncertainty over sovereign debt sustainability and banking solvency, we forecast that the euro will remain under pressure, averaging US$1.31:EUR1 in 2012 and US$1.29:EUR1 in 2013, while acknowledging significant risks of sharp movements in either direction.

  EXTERNAL SECTOR: The current-account surplus amounted to EUR3bn in 2011. We forecast that it will fall to about EUR2.4bn in 2012, then start to increase gradually. Merchandise trade, employment and investment income and transfers will all remain in deficit. Offsetting this will be a large surplus on the services balance, including financial services. The financial services surplus, which had narrowed in 2009, recovered in 2010, and will remain high in 2011-13.

  June 01, 2012

View detailed map

Country Briefing

Land area

2,586 sq km

Population

512,000 (December 31st, 2010)

Luxembourg City (capital): 94,000

Esch-sur-Alzette: 29,000

Differdange: 20,000

Climate

Temperate, transitional in character between the maritime climate of north-west Europe and the semi-continental climate of the east

In Luxembourg City temperatures range from an average of 1°C in January to 18°C in July, with minimums and maximums ranging from around -10°C to 35°C. Annual average rainfall in Luxembourg City is 782 mm

Language

Official languages: Luxembourgish, French and German. Luxembourgish, which is linguistically close to German, is the dialect spoken by the native population. However, it was not codified into a written language until 1985, so French and German are used for official documents and the press. French is the most widely used language of communication between communities and English is widely spoken

Measures

Metric system

Currency

Euro (EUR) = 100 cents

Time

1 hour ahead of GMT in winter, 2 hours ahead in summer

Public holidays

January 1st, Easter Monday, May 1st, Ascension Day, Whit Monday, June 23rd (National Day), August 15th, November 1st, December 25th and 26th

June 11, 2012